Let's peg the NT dollar to the yuan

By the Liberty Times editorial /

Sun, Jan 23, 2005 - Page 8

The news that the EU will demand appreciation of Asian currencies has had an immediate impact. On Monday, the exchange rate from the yen to the euro and yen to the US dollar immediately began to drop on a large scale, while the rate from dollar to yen hit a five-year peak of US$1 for ¥102, prompting Asian currencies, including the South Korean won and Thai baht, but excepting the Chinese yuan and Hong Kong dollar), to uniformly climb. The NT also appreciated by 0.0215 percent, reaching NT$31.804.

Officals at the central bank emphasized that the recent rise in New Taiwan dollar had primarily international causes. The level of appreciation will respect the market mechanism. While the NT dollar has already been rising in comparison with the currencies of neighboring countries, its exchange rate is comparatively stable. Spectators predict that so long as the yen continues to climb, the NT dollar will continue to rise as well. In fact, appreciation by more than NT$0.01 in a single day may become the norm, they say.

Why is the European Central Bank (ECB) so adamant about pushing for a rise in Asian currencies? After the euro's exchange rate to the US dollar began to climb, the ECB has been afraid of a rise in the euro, believing that it will impact the competitiveness of the EU. As early as July 2003, when the euro's exchange rate to the US had climbed up to US$1.13, German Chancellor Gerhard Schroeder demanded that the the exchange rate of the euro should be kept low.

He said that appreciation of the euro will devastate German exporters, causing the German economy to continue in a slump. On the other hand, US trade deficits have continued to reach record highs each year. Before 1995, the US trade deficit was less than US$200 billion. By last year, the figure for the first 11 months reached US$561.3 billion.

For the month of November alone, the figure was US$60.3 billion. The figure for the entire year was expected to reach the astronomical figure of US$600 billion.

The primary ground upon which the ECB wants appreciation for Asian currencies is that after the euro's exchange rate to the US dollar hit rock bottom in 2002, it had experienced a major come back, ascending more than 40 percent last year (if the comparison is made with the rate of 1.3092 at the close of the stock exchange on Jan. 17, then the rise reached 52 percent).

When the initial exchange rate of the euro at the time when the currency initially came into use on December of 2002 -- one euro for US$1.1667 -- is compared with the rate at the end of last year -- US$1.3556 -- the euro's exchange rate to the US dollar climbed up by 16.19 percent.

During the same period, the yen rose by 21.66 percent, while the South Korean won rose 26.13 percent, based on the average exchange rate for the year 1998. This indicates that obviously the euro is not the only currency with an increasingly high exchange rate against the US Dollar. The rise in the yen and the won were much higher than that of the euro. It is very difficult to blame Asian currencies for the economic slump in Europe and the US trade deficit.

The import surplus of the US is a serious problem. So, just what exactly is the root of the problem? Leaving aside the problems with the US, the primary cause should be the exchange rate of the Chinese yuan and Hong Kong dollar -- both Asian currencies.

Last year, China's total trade US$1.15 trillion, making it a major trading country following only the US and Germany. However, after the Chinese currency's exchange rate for the US dollar depreciated from 1.53 in 1980 to 8.3 in 1994, the Chinese government has adopted a policy of pegging the US dollar.

The extremely undervalued yuan has indeed become a magic wand for China in the export competition. In the fifteen years between 1990 and last year, China has cleaned out the global productive capital of many countries, primarily Taiwan. China was turned into the manufacturing site of the world, taking over the global market with its cheap goods. Last year, China's export surplus to the US reached US$144.7 bllion by November. In comparison with the 77.8 billion in 2000, the figure has doubled in four short years.

Therefore, if demands are made for the appreciation of other Asian currencies only, while yuan and Hong Kong dollar are allowed to be pegged to the US dollar, then the depreciation of the US dollar is the equivalent of the depreciation of the yuan and Hong Kong dollar. As a result, more productive capitals of Asian countries will be transferred to China, strengthening the size and the function of China's role as the "factory" of the world. This will be of absolutely no help to the deficit problems of the US.

In fact, it will aggravate the problem. Because the prices of products made in China are cheaper than those manufactured in other Asian countries, the amount of Chinese goods imported to the US will only increase.

Therefore, the European Central Bank should first identify where the source of the problem is. It must realize the magnetism of China and first ask for appreciation of the yuan, rather than blindly ask for appreciation of other Asian currencies, in order to effectively deal with the problem of the global trade imbalance.

In addition, from the standpoint of Taiwan, people must realize that even if Asian currencies appreciate as a result of US and European pressure, the NT can definitely not do the same.

As a result of erroneous policies during this past decade, Taiwan has been incorporated into what the unification camp refers to as the "Greater China economic zone." Currently, the productive capital of Taiwan is rapidly flowing toward China at the rate of 3 to 4 percent of GDP each year (the figure for Japan is 0.05 percent, the US 0.03 percent). As much as 86 percent of the overseas investments made by Taiwanese are in China. The major momentum for this capital movement is the extremely low exchange rate of the yuan.

If Taiwan's government and Central Bank do not face this problem with a more cautious mindset, and follow the market trend in allowing the NT dollar to appreciate along with other Asian currencies, then movement of Taiwanese capital to China will speed up at a rate much faster than the movement of Japanese, Korea and other Asian countries.

The expansion of investments in China by Taiwanese businesses will crowd out domestic investments, further stifling the economic growth of Taiwan which may further put an end to the long-awaited economic revival.

Perhaps, prompted by their ideologies, many academics and officials in Taiwan continue to feel positive about the appreciation of the NT dollar.

Some of them even defend the refusal of China to allow the yuan to appreciate. They often criticize the accumulation of foreign reserves by Taiwan, while keeping their mouths shut about the more than US$600 billion of foreign reserves China.

It is sincerely hoped that these people and our central bank will not be misled by discourses based on such "Greater China" ideologies. Of course, we understand the dilemma of the central bank.

Taiwan is committed to respecting the free market principle in the foreign exchange market. However, faced with China, which refuses to follow the market principle, the only way out is to insist that the NT dollar not rise unless the yuan also rises.